Despite appearing counterintuitive, for those individuals with business interests (or other assets, such as real estate) that have suffered recent depreciation during our recent economic downturn, transfers of these assets should become a planning priority.

One popular form of transfer involves a sale of assets to one or more irrevocable trusts in exchange for a promissory note(s), secured by a pledge agreement. So as to avoid an immediate income consequence upon this sale, the irrevocable trust is often drawn as a grantor trust. As a result, for income tax purposes, this type of transaction is effectively viewed by the Internal Revenue Service as a transaction involving an identical seller and buyer. Therefore, no capital gain is recognized upon the sale to the trust, although the trust-maker would have an ongoing income tax consequence related to the income earned by the trust for a period of time, including recognition of a sale to a third party.

For estate tax purposes, the payment of income tax during the trust term is an indirect gift to one’s family that is not subjected to a gift tax. If the asset sold is likely to experience growth and produce reasonable cash flow (such as dividends), a promissory note can be structured over several years with an approved interest rate by the Internal Revenue Service.

If business interests are transferred, to avoid loss of voting control of the family business, the sale of stock can be limited to nonvoting stock. Generally, stock in a company can be bifurcated into voting and nonvoting stock so that only nonvoting stock is sold to the trust. As a result, the trust-maker continues to remain in control of the voting and decision-making. Furthermore, recapitalization of stock often results in the nonvoting shares representing up to 99% of the value of the company, permitting a transfer of a large portion of value out of one’s estate (although the promissory note’s balance, which is declining, is subject to estate tax at death).

For example, if a business valued at $3 million last year is valued at $1 million this year, monthly payments of approximately $6,325 could be made a period of 20 years with a 4.5% interest rate, assuming 99% of the business is sold to a grantor trust. If the business’ value rebounds with the economy, the increased value will escape a transfer tax to the next generation.

For several years, the Florida Statutes have authorized the use of trusts to provide for the care of one’s pets. The existence of a pet trust can mean the difference between life and death for a pet when its owner becomes incapacitated or dies. Because the owner knows the needs of his or her pet better than anyone else, he or she can specify in writing the type of care desired.

While a pet trust does not need to be funded during the owner’s lifetime, an appointed caretaker will not be able to carry out his or her duties without funds set aside for this purpose in the event of the owner’s incapacity. Therefore, the use of a pet trust during lifetime may be warranted, or at a minimum, upon death of the pet owner.

Pet trusts may be established for any animal or pet including dogs, cats, birds, horses and fish. When you meet with us to review your existing estate planning, we can discuss the best way for you to make sure your beloved pet has its needs met.